INTERNATIONAL
UNIT 2 SECTION 5 THE COMPETITIVE ENVIRONMENT
BUSINESS Unit 2, section 5: The Competitive Environment
Every organisation functions in a closer, more immediate competitive
environment. The competitive environment comprises the specific
organisations or industry within which the international firm interacts. The
competitive environment includes rivalry among current competitors, the
threats of new entrants, the threats of substitutes, the power of suppliers or
creditors, and the power of customers or final consumers.
The competitive environment model was originally developed by Michael
Porter, a Harvard Professor. According to Porter, successful managers do
more than simply react to the environment. In the opinion of Porter,
international managers act in ways that actually shape or change the
organisation’s environment. In strategic decision making, Porter’s model is
an excellent method for analysing the competitive environment in order to
adapt to, or influence the nature of competition.
By the end of this Section, you should be able to;
Know what is meant by the term competitive environment
Identify a firm’s competitors in international business
Assess the threats posed by new entrants and substitute products
Distinguish between suppliers and customers of international business
Now read on ....
Competitors in the Industry
Of the various components of the competitive environment, competitors
within the industry must first deal with one another. When organisations
compete for the same customers and try to win market share at the other’s
expense, all must react to and anticipate their competitors’ actions.
The first question to consider is: Who is a competitor?
Sometimes, the answer to the above is quite obvious. For example, Coca-
Cola and Pepsi Cola are competitors, just as are the Big Three Automakers,
namely General Motors, Toyota, and Nissan by world standards. In much
the same vein, Nokia and Samsung are clear competitors within the Mobile
Phone industry. But much too often, organisations focus too exclusively on
traditional rivals thereby missing out on the emerging ones. United Airlines,
Delta, American, and US Airways have focused their attention to a battle
over long haul and international routes. In the process, they all but ignored
smaller carriers such as Southwest, Alaska Air, and America West that have
grown and succeeded in regional markets.
Thus, as the very first step in understanding their competitive environment,
organisations must identify their competitors. Competitors may include:
Small domestic firms, especially their entry into tiny, premium markets.
Overseas firms, especially their efforts to solidify positions within small
riches (a traditional Japanese tactics).
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Big, new domestic companies exploring new markets.
Strong regional competitors.
Unusual market penetration through Internet advertisement and
shopping.
Once competitors have been identified, the next step is to analyse how they
compete. Competitors use tactics like price reductions, new-product
introductions, and advertising to undercut or counteract their competitor’s
strategy.
Competition is most intense when there are many direct competitors
(including foreign contenders), or when industry growth is slow, or when
the product or service cannot be differentiated in some way. New, high-
growth industries offer enormous opportunities for profits. When an
industry matures and growth slows down, profits drop. Then intense
competition causes an industry shakeout whereby weaker firms are
eliminated, and the strong companies survive.
Following Domestic Competitors Overseas
This theory was expounded by F. T. Knickerbocker, and is based on the idea
that international firms follow their domestic competitors overseas. The
theory has been developed with regard to oligopolistic industries. An
oligopoly is an industry composed of a limited number of large firms. An
industry in which four firms control 80 percent of the domestic market is
considered an oligopoly. An example of an oligopolistic industry in Ghana
is the telecommunication industry where MTN, Vodafone, TiGO, Expresso,
and Airtel control almost 100 percent of the market. What one firm does,
can have an immediate impact on the major competitors, thereby forcing a
quick response in kind.
If a firm in an oligopoly market cuts prices, this can take market share away
from its competitors, forcing the competitors to respond with similar price
cuts to retain their original market share. When one firm raises its prices, the
other firms follow. When one firm expands its capacity its rivals or
competitors follow, lest they be left out in a disadvantageous position. For
example, Toyota and Nissan responded to Honda’s investments in the
United States and Europe by increasing their own FDIs (Foreign Direct
Investments) in the United States and Europe.
Threats of New Entrants into the Industry
New entrants into an industry compete with established companies. If many
factors prevent new companies from entering an industry, the threat to
established firms is less serious. If there are few such barriers to entry, the
threat of new entrants is more serious. Entry barriers are the conditions that
prevent new companies from entering an industry. Some major barriers to
entry are:
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Government policy
Capital requirements
Brand identification
Cost disadvantage
Distribution channels.
The government can limit or prevent entry, just as the Government of Ghana
in 2005 allowed the importation of textiles only through the Takoradi
harbour. The aim of this exercise was to control the inflow of these
products to protect the local industry. Some industries, such as trucking and
liquor retailing, are regulated. More subtle government controls operate in
such fields as mining. Patents are also entry barriers. When patent expires
(like Polaroid’s basic patents on instant photography), other companies (like
Kodak) can take advantage of the situation and easily enter the market.
Other entry barriers are less formal, but can have the same effect. Capital
requirements may be so high that companies will not risk, or try to raise
such large amounts of money in order to enter the industry. Brand
identification forces new entrants to spend heavily to obtain customer
loyalty. The cost advantages of established companies hold true, due to
large size, favourable location, existing assets, and so forth. These can also
be formidable entry barriers.
Finally, existing competitors may have such tight distribution channels that
new entrants have difficulty getting their products or services through to
customers or the final consumers. New entrants must displace existing
products with promotions, price breaks, intensive selling, and other tactics.
Threats of Substitute Products
Technological advances and economic efficiencies are among the ways that
firms can develop substitutes for existing products. For example, Southwest
Airlines have developed strong rivalries within the airline industry. It also
competes in the car rental industry from airports.
Indeed, Southwest has gotten its cost base down to such a low point that it is
now cheaper to fly using Southwest Airlines to any destination within the
US mainland than it is to take a bus or to rent a car. This particular example
shows that substitute products or services can limit another industry’s
revenue potential. Companies in those industries are likely to suffer growth
and earning problems unless they improve quality or, launch aggressive
marketing techniques
In addition to current substitutes, companies need to think about potential
substitutes that may be viable in the near future. More and more people are
buying books and music via the internet. Companies such as Amazon.com
that sells over the internet represent a potential threat to retail stores.
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Traditional bookstores, such as Barnes and Noble have invested heavily in
Web technology to defuse the threat of this potential substitute.
A Table showing Types of Products and their Possible Substitutes
If the product is The substitute might be
Cotton Polyester
Coffee Cocoa
Fossil fuels Solar energy
Movie theatre Home video
Music CD Radio Cassette
Automobile Train, Bus, Motor-bike
Typewriter Personal computer
Sugar Honey / Sweeteners
House Apartment, Mobile Home
Bricks Aluminum siding
Alcoholic beverages Soft drinks
Line Telephone Cellular / Mobile Phone; Pager
The Role of Suppliers or Creditors
Organisations must acquire resources from their environment and convert
those resources into products or services to sell. Suppliers provide the
resources needed for production or transformation, and these may come in
the form of:
Labour – supplied by trade, schools and universities.
Raw materials – supplied by producers, wholesalers and distributors.
Financial Capital – supplied by banks and other financial institutions
But suppliers are important to an organisation for reasons beyond the
resources they provide. Suppliers can raise their prices or provide poor
quality goods and services. Labour Unions can go on strike or demand
higher wages. Workers may produce defective products. Powerful suppliers,
then, can realise an organisation’s profits, particularly if the organisation
cannot pass on price increases to its customers.
One particularly noteworthy set of suppliers to some industries is the
international labour unions. Although unionisation has dropped to about
10% of the private labour force, labour unions are still particularly powerful
in industries such as steel, autos and transportation. Strikes by COSATU
[Confederation of South African Trade Union] show that this Labour Union
in particular, exerts a good deal of influence over how its members are
treated. Labour unions represent and protect the interest of their members
with respect to hiring, wages, working conditions, job security, and due
process appeals. Historically, the relationship between management and
labour unions has been quite adversarial. Currently, however, both sides
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seem to realise that to increase productivity and competitiveness,
management and labour must work together in collaborative relationships.
Troubled labour relations can create higher cost and productivity declines,
and eventually lead to layoffs.
Organisations are at a disadvantage if they become overly dependent on any
powerful supplier. A supplier is powerful if the buyer has few other sources
of supply, or if the supplier has many other buyers. For example, if
computer companies can only go to Microsoft for software, or too little for
microchips, those suppliers can exert a great deal of pressure. In many
cases, companies build up switching costs. Switching costs are fixed costs
buyers face if they change suppliers. For example, once a buyer learns how
to operate a supplier’s equipment, such as computer software, the buyer
faces both economic and psychological costs in changing to a new supplier.
The Role of Customers or Consumers
Customers purchase the products or services the organisation offers.
Without customers or consumers, a company won’t survive. You are a final
consumer when you buy McDonald’s harm burger, or a pair of jeans from a
retailer at the mall. Intermediate customers buy semi-processed materials or
wholesale products and then sell them to final consumers. Intermediate
customers actually make more purchases than individual final consumers
do. Examples of intermediate customers include retailers, who buy clothes
from wholesalers and manufacturers’ representative before selling them to
their customers; and industrial buyers, who buy raw materials before
converting them into final products.
Like suppliers, customers are important to organisations for reasons other
than the money they provide for goods and services. Customers can demand
lower prices, higher quality, unique product specifications, or better service.
They can also play competitors against one another, such as when a car
customer (or a purchasing agent) collects different offers and negotiates for
the best price. Customer service means giving customers what they want or
need, the way they want it, just the very first time. This usually depends on
the speed and dependability with which an organisation can deliver its
products or services. Actions and attitudes that mean excellent customer
service include:
Speed of filing and delivering normal orders.
Willingness to meet emergency needs.
Merchandise delivered in good condition.
Readiness to take back defective goods and resupply quickly.
Availability of installation and repair services and parts.
Service charges (that is, where services are free or priced separately).
In all businesses – services as well as manufacturing – strategies that
emphasise good customer service provide critical competitive advantages.
The organisation is at a disadvantage if it depends too heavily on powerful
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customers. Customers are powerful if they make large purchases, or if they
can easily find alternative places to buy. If you are the largest customer of a
firm, and there are other firms from which you can buy, you have power
over that firm, and you are likely to negotiate with it successfully. Your
firm’s biggest customers – especially if they can buy from other sources –
will have the greatest negotiating power over you.
Summary
In this Section, we have learnt that the environment is made up of rivalry
among current competitors, threats of new entrants, threat of substitutes,
power of suppliers, as well as the power of customers. International
businesses can survive and even flourish if they think and act strategically.
Please, refer to other texts in the references provided for further information
on the meaning and importance of this topic. Put down any important notes
you come across in the blank sheet provided below for face-to-face
discussions with your course lecturer.
Now assess your understanding of this Section by answering the following
Self-Assessment Questions (SAQs). Good luck!
Activity 2.5
What threats do new entrants pose to international businesses?
What is an oligopoly?
Who are competitors?
State five actions that mean excellent customer care.
Did you score all? That’s great! Keep it up.
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